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Thursday, May 24, 2007

Do you know your debt-to-income ratio?

Commonly referred to as DTI, your debt-to-income ratio tells lenders what % of your income you have available for a house payment after fulfilling your other recurring obligations each month.Recurring debt includes credit card payments, child support payments, car payments and other obligations that will not be paid off within 10 months (for conventional loans). Lenders prefer that this number is not more than 36%, but depending on the strength of your loan application your number might be higher or lower. To calculate the DTI ratio, take your total gross annual income and divide it by 12 to get your gross monthly income. Then add up all of your recurring debts including your house payment. Then divide your gross monthly income by this number and you will have your DTI ratio. If your ratio is higher than 36%, then it may mean you are stretching your income too far. In addition, too much revolving debt can drive down your credit scores.